B  H  502  0^3 


GIFT 
NOV  10 1928 


BRANCH  BANKING  WITH  SPECIAL  REFERENCE 
TO  CALIFORNIA  CONDITIONS 


V      OFTHB 

JNIVERSlTYj 


HOWARD  H./^RESTON 

College  of  Business  Administration 
University  of  Washington 


K 


\ 

\ 


\  ' 


Reprinted  from 
The  Journal  of  Political  Economy,  Vol.  XXX,  No.  4,  August  i9aa 


BRANCH  BANKING  WITH  SPECIAL  REFERENCE  TO 
CALIFORNIA  CONDITIONS 


(f 

The  question  of  branch  banking  is  becoming  of  increasing 

practical  importance  in  the  United  States.  At  the  192 1  meeting 
of  the  American  Bankers'  Association  the  question  was  the  sub- 
ject of  debate  and  resolution.  A  bill  has  been  before  Congress 
to  permit  national  banks  located  in  states,  the  laws  of  which 
authorize  branch  banks,  to  establish  branches  in  the  city  where 
the  head  office  is  located.  An  amendment  of  this  character  has 
been  supported  by  the  National  Bank  Division  of  the  American 
Bankers'  Association,  the  Comptroller  of  the  Currency,  and  the 
Federal  Reserve  Board,    ^j 

^California  is  developing  a  system  of  branch  banks  more 
rapidly  and  extensively  than  any  other  state.  In  April,  1922, 
Messrs.  A.  C.  Miller  and  J.  R.  Mitchell,  of  the  Federal  Reserve 
Board,  visited  the  state  to  investigate  California  conditions  in 
order  to  assist  in  formulating  the  Board 's  policy  in  regard  to  state 
bank  members  of  the  Federal  Res  erve  System.  A  Los  Angeles 
national  bank  is  making  an  interesting  test  of  the  national  law, 
which  has  always  been  held  to  prohibit  branch  banking,  by 
establishing  branches  in  the  home  city.  These  developments  cen- 
ter attention  upon  the  California  situation. 

The  purpose  of  this  paper  is  not  primarily  to  set  forth  the 
writer's  views  upon  branch  banking  but  to  present  the  facts 
concerning  the  situation  at  the  present  time.  California  con- 
ditions are  especially  examined  because  of  their  significance  and 
because  of  the  writer 's  special  opportunity  f  or  studying  the  situ- 
ation in  the  state.  Branch  banking  has  been  tried  but  a  com- 
paratively short  time  in  California  so  that  tentative  conclusions 
only  can  be  drawn  from  the  experience  of  her  banks. 

Experience  with  branch  banking. — While  branch  banking  is 
little  practiced  in  our  American  states  it  is  characteristic  of 
banking  systems  in  practically  all  other  commercial  nations. 

494 


696609 


BRANCH  BANKING  IN  CALIFORNIA  495 

Commercial  banking  in  Canada  is  carried  on  by  seventeen 
chartered  banks  consisting  of  4,851  branches  (as  reported  in 
February,  1922).  Of  these  branches  154  are  located  outside  of 
the  Dominion  and  the  remainder  are  domestic  offices.  There  is 
no  central  bank  in  Canada,  nor  any  institution  similar  to  our 
own  Federal  Reserve  banks.  European  systems  can  best  be 
characterized  as  made  up  of  a  few  large  banks  with  branches 
headed  up  by  a  quasi-public  central  bank.  The  English  system 
is  typical  of  this  class.  On  December  31,  1920,  there  were  in 
England  twenty  joint-stock  banks  and  five  private  banks.  The 
joint-stock  banks  had  7,257  branches.  The  Bank  of  England  has 
only  eleven  branches  in  England  and  none  in  foreign  countries.1 
HEarly  banking  in  America  also  furnished  many  examples  of 
rbranch  systems.  The  First  Bank  of  the  United  States  had  eight 
branches  and  the  Second  Bank  of  the  United  States  had  twenty- 
five  branches.  The  state  banks  of  Indiana,  Ohio,  and  Iowa  were 
typical  branch  systems.  The  Free  Banking  System  of  New 
York  was  the  chief  model  for  the  national  system.  Control  of 
note  issue  was  accomplished  in  the  Free  Banking  System  by 
allowing  each  bank  to  obtain  a  separate  charter  and  protect  its 
note  -issue  by  the  deposit  of  bonds.  Following  this  model  the 
national  law,  therefore,  provided  for  unit  banks  and  bond-secured 
currency.  The  Federal  Reserve  Act  provided  for  foreign 
branches  of  national  banks,  under  certain  limitations,  but  made 
no  reference  to  domestic  branches.  Federal  Reserve  banks 
were  given  authority  to  establish  branches,  and  twenty-three 
branches  have  been  established  by  the  twelve  reserve  banks. 
The  experience  with  these  branches  has  been  entirely  satis- 
factory. 

Branches  of  national  banks. — The  national  banking  law  makes 
no  provision  for  branches  of  the  banks  created  thereunder,  but 
there  is  nothing  in  the  language  of  the  statute  which  expressly 
prohibits  national  banks  from  establishing  branches.  Section 
5134  of  the  Revised  Statutes  requires  the  organization  certificate 
to  specify  among  other  things:  "The  place  where  its  operations 
of  discount  and  deposit  are  carried  on,  designating  the  state, 

1  As  reported  in  the  banking  number  of  the  London  Economist,  May  21,  1921. 


49°  HOWARD  H.  PRESTON 

territory,  or  district,  and  the  particular  county,  or  city,  town,  or 
village." 

It  is  further  provided  (Sec.  5190)  that  "The  usual  business 
of  each  national  banking  association  shall  be  transacted  at  an 
office  or  banking  house  located  in  the  place  specified  in  its 
organization  certificate." 

The  national  banking  law  gives  the  Comptroller  ample  power 
of  control  and  regulation  over  the  general  business  of  the  banks. 
The  fact  that  he  is  not  given  any  specific  power  to  regulate  the 
establishment  and  conduct  of  branches  seems  clearly  to  indicate 
it  was  not  the  intention  of  Congress  to  authorize  the  establish- 
ment of  branches.  This  view  is  further  supported  by  the  fact 
that  the  law  has  specifically  permitted  state  banks,  when  con- 
verted, to  retain  their  branches  (Sec.  5155).  The  attitude  of 
Congress  is  further  shown  by  the  act  of  May  12,  1892,  providing 
that  any  national  bank  in  Chicago,  under  specific  authorization, 
could  conduct  a  banking  office  on  the  exposition  grounds.  A 
similar  act  was  passed  for  St.  Louis  at  the  time  of  the  Louisiana 
Purchase  Exposition.  The  law  must  ultimately  be  interpreted 
by  the  courts  rather  than  by  subsequent  acts  of  Congress,  but 
these  sections  and  amendments  indicate  rather  clearly  the  atti- 
tude of  the  law-makers. 

The  construction  of  the  law  by  the  Comptroller  has  been  uni- 
formly that  a  national  bank  must  transact  its  usual  business  in 
one  office.  In  191 1  the  Lowry  National  Bank  of  Atlanta,  Geor- 
gia, requested  permission  to  establish  a  branch  office  in  the  city. 
An  opinion  was  asked  of  the  Attorney- General  by  the  Treasury 
Department.  J.  A.  Fowler,  assistant  to  the  Attorney- General, 
wrote  the  opinion  which  was  approved  by  Attorney- General 
George  W.  Wickersham,  denying  the  right  of  a  national  bank  to 
establish  a  branch  for  the  purpose  of  carrying  on  a  general  bank- 
ing business.1  No  case  appears  to  have  been  brought  in  the 
courts  testing  the  right  of  a  national  bank  to  establish  branches. 
In  his  opinion  Mr.  Fowler  cited  the  case  of  the  Oakland  County 
Bank,  which  was  established  by  a  special  act  of  the  legislature 
of  Michigan  and  later  opened  a  branch  in  Detroit.     There  was 

1  Opinions  of  the  Attorneys  General,  XXIX,  81. 


BRANCH  BANKING  IN  CALIFORNIA  497 

no  specific  prohibition  against  branches  but  its  action  was  held 
to  be  illegal  by  the  courts.1  On  the  other  hand  the  courts  have 
clearly  recognized  the  distinction  between  a  mere  agency  for 
the  transaction  of  a  particular  business,  such  as  the  purchase  of 
bills  of  exchange,  and  a  branch  bank  for  carrying  on  a  general 
banking  business.  The  power  to  establish  agencies  has  been 
sustained  by  the  courts.2 

The  Solicitor  of  the  Treasury  has  also  held  that  a  national 
bank  may  not  establish  a  branch  or  agency  for  the  purpose  of 
receiving  deposits  and  cashing  checks.3 

The  fact  that  the  law  as  interpreted  has  stood  in  the  way  of 
the  direct  establishment  of  branches  by  the  national  banks 
has  not  prevented  them  from  acquiring  chains  of  branch  banks 
indirectly.  Three  principal  methods  have  been  used  to  bring 
this  about:  First,  national  banks  formerly  state  banks,  when 
converted,  have  continued  to  operate  branches;  second,  state 
banks  having  branches  have  been  consolidated  with  national 
banks;  third,  an  affiliated  state  bank  or  trust  company  is  organ- 
ized and  owned  by  the  same  stockholders  for  the  purpose  of 
establishing  branches. 

In  his  192 1  report  the  Comptroller  lists  (p.  107)  twelve 
national  banks  which  fall  in  the  first  group — those  which  had 
branches  when  converted  from  state  banks.  With  one  excep- 
tion these  banks  all  have  their  branches  located  within  the  same 
city  as  the  parent  bank.  The  exception  is  the  Bank  of  California, 
National  Association,  of  San  Francisco.  This  bank  has  branches 
at  Portland,  Seattle,  and  Tacoma.  It  is  an  old  institution  and  in 
the  gold  days  maintained  branches  at  Virginia  City  and  New  York 
in  order  to  deal  in  bullion.  It  subsequently  closed  these  branches 
and  found  other  means  of  handling  this  part  of  its  business.  In 
1005  the  Bank  of  California,  then  a  state  bank,  consolidated  with 
the  London  and  San  Francisco  Bank,  an  English  institution  with 
head  office  in  London  and  branches  in  San  Francisco,  Portland, 
Seattle,  and  Tacoma.     In  February,  19 10,  the  Bank  of  California 

1  People  v.  Oakland  County  Bank,  I  Douglass  282,  288. 
a  Bank  of  Augusta  v.  Earle,  13  Pet.  519. 
3  Pratt's  Digest,  edition  1920,  p.  100. 


498  HOWARD  H.  PRESTON 

became  a  national  association,  bringing  with  it  into  the  system 
the  three  northern  branches.  This  bank  has  specialized  in  hand- 
ling grain  exports  to  European  countries  and  finds  these  branches 
essential  in  handling  the  accounts  of  large  exporting  firms  which 
have  their  offices  in  these  four  exporting  cities. 

Only  five  national  banks  are  operating  branches  as  a  result 
of  consolidation  with  state  banks.1  Three  of  these  are  large 
New  York  banks  and  these  three  together  with  three  other  New 
York  City  banks,  converted  from  state  banks,  operate  an  aggre- 
gate of  forty  branches.  The  existence  of  those  branches  is 
largely  responsible  for  the  popular  but  erroneous  idea  that 
national  banks  have  a  right  to  establish  branches  under  certain 
limitatons.  It  does  make  it  possible  for  a  national  bank  to 
operate  branches  but  it  does  not  enable  a  national  bank  to  estab- 
lish any  additional  branches. 

No  data  are  available  as  to  the  number  of  national  banks 
indirectly  operating  branches  through  affiliated  state  banks  or 
trust  companies.  Such  cases  have  not  been  uncommon  in  states 
which  accord  to  state  banks  the  privilege  of  establishing  branches. 
In  California  there  are  several  examples  of  national  and  state 
banks  under  joint  ownership  where  the  state  institution  operates 
a  chain  of  branches.  For  instance,  the  First  National  Bank  of 
Berkeley  controlled  a  chain  of  branches  in  the  city  through  the 
Berkeley  Bank  of  Savings  and  Trust  Company.  The  First 
National  Bank  of  Los  Angeles  and  the  Los  Angeles  Trust  and 
Savings  Bank  are  under  one  ownership  and  this  institution  has 
been  one  of  the  most  active  in  the  recent  extension  of  branch 
banking  in  California. 

In  these  three  ways,  therefore,  national  banks  have  succeeded 
in  getting  around  the  law  which  has  stood  in  the  way  of  their 
establishing  branches.  Although  no  figures  are  available  there 
are  probably  more  branches  operated  through  affiliated  state 
institutions  than  by  either  of  the  other  two  methods.  Where  a 
national  bank  has  succeeded  to  the  business  of  a  state  bank  with 
branches,  or  consolidated  with  a  state  bank,  the  possibility  of 

1  Under  authority  of  the  consolidation  act  of  November  7,  1018.  See  Report 
of  the  Comptroller  of  the  Currency,  192 1,  pp.  108-9. 


BRANCH  BANKING  IN  CALIFORNIA  499 

further  extending  its  branch  system  is  at  an  end.  Moreover,  it 
may  prove  very  expensive  to  acquire  a  state  bank  for  this  pur- 
pose. 

Believing  that  the  national  law  may  fairly  be  construed  to 
allow  a  bank  to  establish  branches  in  its  home  city,  W.  A. 
Bonynge,  president  of  the  Commercial  National  Bank  of  Los 
Angeles,  has  set  up  several  agencies,  or  branches,  in  Los  Angeles. 
This  action  followed  a  conference  which  Mr.  Bonynge  and  his 
attorney  held  with  Comptroller  D.  R.  Crissinger  at  Washington. 
The  Commercial  National  Bank  now  has  in  operation  three 
of  the  branches,  the  establishment  of  which  has  been  formally 
approved  by  the  comptroller.  Instead  of  branches  these  will 
be  known  as  agencies.  But  the  name  means  little,  for  it  is  the 
purpose  of  the  officers  of  the  bank  to  receive  deposits,  pay 
checks,  and  carry  on  such  other  banking  functions  as  they  deem 
expedient  at  these  agencies.  If  the  establishment  of  branches 
should  be  held  to  be  illegal  the  obvious  remedy  is  to  convert  into  a 
state  bank.  This  the  bank's  president  states  he  will  do  rather 
than  give  up  the  right  to  operate  branches.  The  test  of  the 
national  law  upon  this  point  is  attended,  therefore,  with  compara- 
tively little  risk  to  the  Los  Angeles  bank.  But  the  possible  conse- 
quences of  the  action  are  quite  far-reaching.  If  it  is  lawful  for  a 
California  national  bank  to  establish  branches,  it  is  equally  so  for 
national  banks  jn  other  states,  even  where  state  banks  are  not 
accorded  that  privilege.  State  banks  will  then  feel  that  they 
are  subjected  to  unfair  competition.  Conditions  will  be  just 
the  reverse  of  those  now  existing  in  California  and  other  states 
where  state  banks  are  free  to  establish  branches  and  national 
banks  are  not  accorded  a  like  privilege. 

The  obvious  solution  appears  to  be  to  amend  and  clarify  the 
national  law  in  the  interest  of  justice  and  uniformity.  National 
banks  located  in  states  which  allow  state  banks  to  establish 
branches  should  be  granted  the  same  right.  At  the  last  annual 
meeting  of  the  American  Bankers'  Association  (held  at  Los 
Angeles,  October,  192 1)  the  National  Bank  Division  adopted  a 
resolution  requesting  Congress  "to  so  amend  the  National  Bank 
Act  as  to  permit  national  banks  to  maintain  and  operate  branches 


500  HOWARD  H.  PRESTON 

within  the  corporate  limits  of  the  cities  in  which  the  head  offices 
of  such  national  banks  are  located,  to  be  confined,  however,  to 
states  in  which  state  chartered  institutions  are  authorized  to 
have  branches."1 

The  writer  sees  no  valid  reason  why  this  request  of  the 
national  bankers  should  not  be  granted.  In  fact  it  appears  that 
Congress  should  go  farther  and  allow  them  the  same  privileges  as 
are  accorded  to  state  banks  in  the  various  states.  It  will  be 
necessary,  if  California  national  banks  are  to  be  placed  on  a 
footing  of  equality  with  state  banks,  to  allow  national  banks  to 
establish  branches  anywhere  within  the  state. 

If  this  is  not  done  the  national  system  seems  bound  to  suffer 
a  relative  decline.  The  superintendent  of  banks  in  California 
reported  that  during  the  fiscal  year  ended  June  30,  1921,  nine 
national  banks  joined  the  state  system  and  six  state  banks  con- 
verted into  national  banks.  The  net  gain  to  the  state  system  in 
aggregate  assets  was  $55,51  i,ooo.2  This  tendency  has  been 
continuing  since  that  time.3 

National  banks  do  not  appear  to  have  converted  into  state 
banks  for  the  purpose  of  establishing  branches  of  their  own  but 
have  come  into  the  state  system  principally  as  branches  of  state 
banks.  For  instance,  when  the  Mercantile  Trust  Company  of 
San  Francisco  recently  acquired  the  First  National  Bank  of 
Berkeley,  it  withdrew  from  the  national  system  an  institution 
which  on  September  6,  1921,  reported  over  $6,000,000  of  total 
resources.4  Seven  national  banks  are  included  in  the  group  to 
be  merged  with  the  Los  Angeles  Trust  and  Savings  Bank.5 
These  larger  state  banks  are  members  of  the  Federal  Reserve 
System.  In  this  way  they  get  practically  all  the  advantages  of 
national  organization.  Approximately  fifty  state  banks  in  Cali- 
fornia are  members  of  the  Federal  Reserve  System.6    Twenty- 

1  Journal  of  the  American  Bankers'  Association,  November,  192 1,  p.  405. 

2  Report  of  the  Superintendent  of  Banks,  1921,  pp.  24,  25. 

3  Coast  Banker,  April,  1922,  p.  388. 

*  Report  of  the  Comptroller  of  the  Currency,  1921,  p.  483. 

s  Bulletin  of  the  California  Bankers'  Association,  May,  1922,  p.  159. 

6  Coast  Banker,  March,  1922,  p.  290. 


BRANCH  BANKING  IN  CALIFORNIA 


50I 


five  of  these  with  total  resources  of  $720,544,000  on  December 
31,  192 1,  were  operating  branches.  These  twenty-five  banks 
represented  46  per  cent  of  the  resources  of  the  state  system. 

Branches  of  state  banks. — Continuous  data  concerning  the  laws 
of  the  states  generally  in  regard  to  branch  banking  are  not  avail- 
able. In  19 10  Professor  George  E.  Barnett,  investigating  for 
the  National  Monetary  Commission,  reported  that  the  laws  of 
nine  states  permitted  branches  of  state  banks,  eight  states  spe- 
cifically prohibited  branches,  and  in  the  remainder  the  law  was 
silent.  In  the  majority  of  states  where  there  was  no  specific 
provision  for  branches  they  were  held  to  be  unlawful.1 

The  Federal  Reserve  Bank  of  San  Francisco  has  just  com- 
pleted a  digest  of  the  laws  of  the  several  states  relative  to  branch 
banking.  Data  were  obtained  directly  from  the  other  Federal 
Reserve'banks  concerning  the  laws  of  the  states  in  their  district. 
Through  the  courtesy  of  the  officers  of  the  Federal  Reserve 
Bank  of  San  Francisco  this  digest  was  available  to  the  writer 
and  a  summary  of  it  is  presented  herewith: 

SUMMARY  OF  THE  LAWS  OF  THE  SEVERAL  STATES 
RELATIVE  TO  BRANCH  BANKING 


Permitted 

Prohibited 

No  Specific  Provision 

Arizona 

Alabama 

*Arkansas 

California 

Colorado 

District  of  Columbia 

Delaware 

Connecticut 

Florida 

Georgia 

Idaho 

Illinois 

Louisiana 

Indiana 

Iowa 

Maine 

Missouri 

Kansas 

Massachusetts 

New  Hampshire 

fKentucky 

Mississippi 

New  Jersey 

*Maryland 

New  York 

New  Mexico 

*Michigan 

North  Carolina 

North  Dakota 

Minnesota 

Ohio 

Oregon 

Montana 

^Pennsylvania 

South  Dakota 

Nebraska 

Rhode  Island 

Texas 

Nevada 

South  Carolina 

Utah^ 

Oklahoma 

Tennessee 

Washington 

Vermont 

Virginia 

Wisconsin 

West  Virginia 

Wyoming 

*  Branch  banking  is  practiced. 

t  Power  denied  by  the  courts  but  there  is  one  bank  having  branches. 

X  Only  by  special  act  of  the  legislature. 

1  State  Banks  and  Trust  Companies  since  the  Passage  of  the  National  Bank- Act. 
Publications  of  the  National  Monetary  Commission.  Senate  Document  No.  659, 
61st  Congress,  Second  Session. 


502  HOWARD  H.  PRESTON 

Classification  of  states  according  to  whether  or  not  branch 
banking  is  permitted  is  difficult.  Exceptions  are  numerous  and 
the  lack  of  specific  provisions  in  the  law  places  some  states  in  an 
uncertain  position.  It  will  be  noted  that  the  laws  of  sixteen 
states  now  prohibit  branch  banks,  seventeen  states  permit  them, 
and  in  fifteen  states  and  the  District  of  Columbia  there  is  no 
specific  provision  in  the  law.  Of  the  fifteen  states  in  the  laws  of 
which  there  is  no  specific  reference  to  branches,  four  practice 
branch  banking  to  some  extent  and  the  other  eleven  do  not 
now  allow  branches  of  state  banks.  This  increases  the  total 
number  of  states  in  which  branch  banking  is  not  tolerated  to 
twenty-seven,  and  of  those  in  which  it  is  apparently  allowed  in 
some  form  to  twenty-one.  The  laws  of  some  states,  for  example, 
New  York,  Massachusetts,  and  Ohio,  permit  branches  only  in 
the  same  city.  Branches  are  now  permitted  in  New  York  only 
in  cities  of  50,000  or  more. 

In  some  states  where  branches  are  now  prohibited,  banks 
are  still  operating  branches  established  prior  to  the  passage  of 
the  present  law.  Professor  R.  B.  Westerfield  shows  that  state 
banks  in  at  least  twenty-three  states  were  operating  branches  in 
1920.1  Alabama,  New  Jersey,  Washington,  Wisconsin  and  Indi- 
ana, are  states  having  branch  banks,  according  to  his  compila- 
tion, the  laws  of  which  now  prohibit  the  establishment  of  new 
branches.  These  states  cut  off  the  right  of  banks  to  establish 
branches  in  the  years  1911,  1915,  1919,  1919,  and  1921,  respec- 
tively. A  comparison  of  the  1922  figures  with  those  of  Professor 
Barnett  for  19 10  shows  a  gain  in  the  number  of  states  in  which 
branch  banking  is  being  practiced. 

Banks  have  sometimes  been  brought  under  single  control 
even  in  states  where  branches  are  not  permitted.  A  national 
bank  is  prohibited  from  owning  the  stock  of  another  bank  and 
the  laws  of  a  majority  of  the  states  also  prohibit  state  banks  from 
owning  the  stock  of  other  banks.  But  it  is  almost  impossible 
to  prevent  the  ownership  of  several  banks  by  the  same  person 
or  group  of  persons  or  a  holding  company  formed  for  this  purpose. 

1  Banking  Principles  and  Practice,  II,  298. 


BRANCH  BANKING  IN  CALIFORNIA  503 

In  this  way  "chains"  of  banks  have  been  maintained  in  spite  of 
prohibitory  laws. 

Branches  of  state  banks  in  California. — The  Bank  Act  of  Cali- 
fornia provides  that  branch  offices  may  be  established  with  the 
written  approval  of  the  superintendent  of  banks.  He  is  directed 
to  give  such  approval  only  when  "he  has  ascertained  to  his  satis- 
faction that  the  public  convenience  and  advantage  will  be  pro- 
moted by  the  opening  of  such  branch  office."1 

When  the  branch  office  is  to  be  opened  in  the  city  where  the 
principal  office  of  the  bank  is  maintained  the  bank  must  have 
$25,000  capital  for  each  branch  in  excess  of  the  minimum  require- 
ment for  a  state  bank  in  that  city.  For  each  branch,  other  than 
a  trust  company,  outside  of  the  principal  place  of  business  the 
capital  must  be  at  least  equal  to  the  amount  required  for  an 
independent  bank  at  the  place  where  each  branch  is  established. 
In  other  words,  a  San  Francisco  bankwhich  wishes  to  establish  a 
branch  in  Berkeley  must  have  a  minimum  capital  of  $300,000 
plus  $100,000  for  the  Berkeley  branch,  this  being  the  amount 
required  for  separate  institutions  in  these  cities. 

The  law  further  limits  the  extension  of  business  upon  a  given 
capital  by  fixing  a  minimum  percentage  of  capital  and  surplus 
to  deposit  liabilities,  graduated  according  to-  the  volume  of 
deposits.  In  commercial  banks  the  proportion  ranges  from  10 
per  cent  of  deposits  up  to  and  including  $2,000,000,  to  5  per  cent 
of  deposits  in  excess  of  $5,000,000.  In  savings  banks  the  propor- 
tions are  graduated  down  from  10  per  cent  on  deposits  of  $1,000,- 
000  or  less  to  1  per  cent  on  deposits  in  excess  of  $25,000,000.* 
Since  a  branch  system  is  treated  as  a  unit  this  principle  of 
graduation  enables  a  bank  having  fifty  branches  to  carry  on  a 
given  volume  of  business  with  less  capital  and  surplus  than  if 
the  system  consisted  of  fifty  unit  banks. 

As  a  matter  of  fact  there  does  not  appear  to  be  any  tendency 
for  the  banks  to  utilize  this  possibility.  An  examination  of  the 
statements  of  the  larger  banks  shows  that  they  have  capital 

1  Bank  Act  of  California,  Section  9. 
*  Ibid.,  Section  19. 


504  HOWARD  H.  PRESTON 

and  surplus  far  in  excess  of  the  minimum  requirements.  Gener- 
ally speaking  the  capital  is  increased  as  the  number  of  branches 
increases.  It  is  true,  nevertheless,  that  many  mergers  result  in 
a  temporary  decrease  in  banking  capital,  since  stockholders  of 
the  bank  to  be  absorbed  are  paid  in  cash  or  by  stock  in  the  larger 
bank,  which  stock  the  directors  have  obtained  for  this  purpose 
by  purchase  in  the  market.  The  combined  capital  is  thus 
reduced  by  the  amount  of  the  capital  of  the  bank  absorbed. 
This  has  been  done  in  more  than  one  of  the  recent  consolidations. 
Another  method,  used  by  at  least  one  of  the  Los  Angeles  banks, 
is  to  exchange  unissued  stock  in  the  main  bank  for  the  stock  of 
the  bank  to  be  absorbed.  Authorized  stock  is  held  in  the  treas- 
ury which  may  be  used  for  this  purpose. 

At  the  present  time  (May,  1922)  there  are  seventy-nine  state 
banks  in  California  operating  254  branch  offices.  Of  these 
branches  151  are  in  cities  other  than  those  in  which  the  banking 
corporations  maintain  their  principal  place  of  business.  The 
remaining  103  branches  are  in  the  same  city  as  the  head  office  of 
the  bank. 

The  general  policy  of  the  superintendents  has  been  to  sanction 
the  establishment  of  branches  in  outside  cities  only  through  the 
acquisition  of  existing  institutions.  In  the  case  of  branches  or 
agencies  in  the  same  city  very  little  restriction  has  been  imposed 
upon  the  action  of  the  banks.  The  purpose  of  the  policy  of 
limiting  the  extension  of  banking  offices  in  country  towns  is  to 
protect  the  banks  and  public  against  the  evils  of  excessive 
competition.  Exception  has  been  made  when  local  conditions 
seemed  to  warrant  the  establishment  of  another  bank. 

Metropolitan  branch  banking. — In  discussing  branch  banking 
in  California  different  types  of  development  must  be  recognized. 
Distinction  must  be  made  between  what  might  be  called  metro- 
politan branch  banking  and  state-wide  or  district  branch  bank- 
ing. 

In  the  larger  cities  of  the  state,  chiefly  San  Francisco  and 
Los  Angeles,  there  has  been  quite  a  marked  development  of  what 
can  best  be  described  as  metropolitan  branch  banking.  This 
type  of  branch  system  is  found  in  several  other  cities  of  the 


BRANCH  BANKING  IN  CALIFORNIA 


505 


United  States  so  that  California 's  experience  in  this  respect  is  not 
unique.  Convenience  of  patrons  is  the  primary  cause  of  the 
growth  of  this  type  of  branch  banking.  The  following  list 
includes  the  principal  banks  of  this  type,  but  does  not  include  the 
Bank  of  Italy  and  the  Los  Angeles  Trust  and  Savings  Bank, 
which  are  also  operating  numerous  metropolitan  branches: 

LIST  OF  PRINCIPAL  BANKS  ENGAGED  IN  "METROPOLITAN" 

BRANCH  BANKING  WITH  NUMBER  AND  LOCATION  OF 

BRANCHES,  MAY  22,  1922 


Head  Office 

Branches 

Bank 

Location 

Number 

California  Bank 

Los  Angeles 

Los  Angeles 
Los  Angeles 

Los  Angeles 

San  Francisco 
San  Francisco 

San  Francisco 

Oakland 

Oakland 

Los  Angeles 

Hollywood 
1  San  Pedro 
]  Santa  Monica 

Sawtelle 

Van  Nuys 

/Los  Angeles 
\Hollywood 

Los  Angeles 
Blythe 
Redlands 
Riverside 
San  Pedro 

Los  Angeles 

Glendale 

Hollywood 
1  Huntington  Beach 
]  Long  Beach 

Pasadena 

South  Pasadena 

San  Pedro 

San  Francisco 
/San  Francisco 
\Berkeley 

San  Francisco 

Oakland 
Berkeley 
Modesto 

/Oakland 
[Berkeley 

21 

3 
I 

Citizens  Trust  and  Savings . . . 

Hellman    Commercial    Trust 
and  Savings 

I 
I 
I 

13 

I 

9 

1 

Security  Trust  and  Savings .  . . 

Anglo-California  Trust  Com- 
pany  

1 
1 

9 

1 
2 

1 

3 
1 
1 

1 

5 
1 

4 

Mercantile  Trust  Company. . . 

San    Francisco    Savings    and 
Loan  Society 

American  Bank 

3 
5 

Oakland  Bank  of  Savings.  . . . 

1 

8 

1 

A  distinction  may  even  be  made  between  the  banks  in  the 
foregoing  list.     Some  of  them  have  confined  their  operations 


506  HOWARD  H.  PRESTON 

almost  entirely  within  the  corporate  limits,  others,  notably  the 
Security  Trust  and  Savings  Bank  of  Los  Angeles  and  the  Mer- 
cantile Trust  Company  of  San  Francisco,  are  looking  to  a  wider 
area  of  development.  There  is  nothing  to  prevent  any  of  these 
banks  from  extending  the  field  of  their  operations  to  a  still  larger 
zone  or  area. 

The  development  of  "metropolitan"  branch  banking  has 
been  most  notable  in  Los  Angeles.  The  leadership  has  been 
taken  by  the  California  Bank  which  has  been  developing  its 
branch  system  for  seventeen  years.  In  recent  months  the  exten- 
sion has  been  very  rapid  on  the  part  of  several  of  the  banks. 
Two  circumstances  appear  to  make  for  the  popularity  of  branch 
offices  in  Los  Angeles.  The  chief  business  and  financial  area  of 
the  city  is  very  restricted,  the  leading  stores,  offices,  and  banks 
being  located  within  a  few  city  blocks.  Traffic  congestion  is  so 
great  that  it  is  very  difficult  for  the  suburbanite  to  drive  in  with 
his  car  and  get  parking  space  near  his  bank  while  he  transacts  his 
business.  For  this  reason  some  of  the  leading  retail  establish- 
ments have  also  found  it  advantageous  to  decentralize.  The 
second  factor  is  the  large  area  within  the  city  limits. 

Many  of  these  branches  are  at  present  simply  "  service  sta- 
tions" and  not  banks  in  the  full  sense.  Of  the  twenty-seven 
branches  of  the  California  Bank,  outside  of  the  head  office,  only 
three  carry  on  all  banking  functions.  All  of  them  receive  de- 
posits and  pay  checks.  It  is  the  loaning  function  which  is 
restricted  to  the  leading  offices.  Obviously  this  is  the  phase  of 
banking  which  requires  experience  and  discretion  and  cannot  be 
safely  delegated  to  a  clerk.  Even  in  those  branches  where  loans 
are  not  made,  however,  the  borrower  may  file  his  application  at 
the  agency  and  have  it  forwarded  to  the  head  office  where  it  will 
be  acted  upon  the  next  day.  In  this  way  the  borrower  may  save 
a  trip  to  the  downtown  office.  The  note  itself  and  the  credit 
information  pertaining  to  it  are  filed  in  these  instances  at  the 
head  office. 

The  policy  of  the  Security  Trust  and  Savings  Bank  on  the 
other  hand  is  to  give  to  its  branches  full  banking  functions. 
There  are  only  two  of  its  branches  which  at  present  do  not  have 


BRANCH  BANKING  IN  CALIFORNIA  507 

independent  power  of  making  loans.  Most  of  its  managers  are 
vice-presidents  of  the  bank.  Loans  are  made  by  them  in  the 
same  way  as  at  the  head  office.  As  members  of  the  loan  commit- 
tee of  the  bank  they  pass  upon  loan  applications  which  come  in 
to  the  head  office.  Loans  made  at  the  branches  are  dealt  with  in 
the  same  manner.  Naturally  many  loans  are  granted  by  the 
loaning  officers  in  the  head  office  and  at  the  branches  without 
first  being  passed  upon  by  the  loan  committee.  Small  loans, 
loans  of  unquestioned  quality,  loans  where  the  borrower's 
general  credit  line  has  already  been  approved,  are  all  freely  made 
in  either  place.  By  this  method  the  loaning  policy  of  the  entire 
system  is  co-ordinated  and  the  patrons  of  a  branch  are  dealt  with 
the  same  as  those  at  the  head  office. 

It  is  very  doubtful  if  present  conditions  in  Los  Angeles  war- 
rant the  establishment  of  so  many  banking  institutions.  How- 
ever it  is  the  testimony  of  officers  of  the  California  Bank,  which 
has  been  longest  in  the  field,  that  practically  every  one  of  its 
branches  is  self-supporting  and  that  in  the  aggregate  they  are 
profitable  business  getters.  The  present  scramble  on  the  part  of 
all  of  the  banks  to  obtain  locations  for  branch  offices  confirms 
this  testimony.  The  superintendent  of  banks  has  imposed 
practically  no  restrictions  upon  the  extension  of  branches  within 
the  city.  While  he  is  of  the  opinion  that  the  number  of  banks 
is  unnecessarily  large  he  has  not  been  able  to  bring  about  any 
practicable  plan  of  development  along  other  lines.  The  result 
is  an  "open  season"  for  establishing  branch  offices.  It  appears 
not  to  be  feasible  and  might  prove  unlawful  for  the  interested 
bankers  to  divide  the  territory  and  thus  avoid  duplication  and 
wasteful  competition.  The  banks  which  would  prefer  not  to 
expand  their  branch  system  so  extensively  are  confronted  with  a 
condition  and  not  a  theory.  Theoretically  the  unit  bank  with  a 
limited  number  of  strategically  located  branches  would  be  more 
economical.  But  the  actual  condition  is  that  banks  pursuing 
this  policy  are  losing  deposits  to  the  bank  with  conveniently 
located  branches. 

Whether  or  not  the  " service  station"  type  of  branch  can 
continue  indefinitely  has  not  been  fully  demonstrated.     It  is 


^5°8  HOWARD  H.  PRESTON 

the  opinion  of  some  bankers  that  eventually  these  branches  will 
be  forced  by  competition  to  add  other  banking  functions  until 
they  become  full  banks.  There  is  no  disposition  on  the  part  of 
the  banks  which  are  creating  this  type  of  branches  to  resist  this 
tendency  if  the  demand  calls  for  other  services.  Substantial 
bank  buildings  are  being  built  in  many  cases  which  indicates 
the  purpose  of  the  founders  to  make  the  branches  permanent. 
As  the  districts  in  which  they  are  located  develop  they  expect  to 
expand  their  functions.  Certain  residential,  retail,  or  factory 
districts  may  never  need  a  bank  prepared  to  make  loans  inde- 
pendently but  will  prove  very  profitable  locations  for  carrying  on 
receiving  and  paying  functions. 

Branch  banking  by  economic  districts. — The  Bank  of  Italy,1 
with  head  office  in  San  Francisco,  is  the  only  bank  which  has 
anything  approximating  a  state-wide  system.  Its  network  of 
about  sixty  branches  and  affiliated  banks  covers  all  the  larger 
cities  of  the  state.  The  Bank  of  Italy  is  the  leader  in  the  branch- 
banking  movement  in  California  in  number  of  branches  as  well 
as  in  area  covered.  Through  an  auxiliary  corporation  it  also 
controls  the  East  River  National  Bank  and  the  Commercial 
Trust  Company  of  New  York. 

Any  analysis  of  the  causes  of  this  type  of  branch  development 
cannot  ignore  the  part  played  by  the  aggressive  policy  of  the 
Bank  of  Italy.  This  bank  was  founded  in  1904  and  on  March 
10,  1922,  reported  total  resources  of  $196,927,012.  Data  are  not 
available  showing  the  aggregate  resources  added  to  the  institu- 
tion through  the  absorption  of  existing  banks  but  this  has  con- 
tributed very  largely  to  the  growth  of  its  volume  of  business. 

Representative  banks  covering  a  more  limited  economic  area 
are  also  shown  in  the  map.  In  extent  of  area  covered  the  Los 
Angeles  Trust  and  Savings  Bank  ranks  next  to  the  Bank  of 
Italy.  This  bank  is  affiliated  with  the  First  National  Bank  of 
Los  Angeles,  through  joint  ownership  of  stock.  The  two  Los 
Angeles  institutions  are  not  housed  in  the  same  building  but 
carry  on  their  banking  functions  in  the  city  separately.     The 

1  The  Bank  of  Italy  is  not  a  foreign-owned  corporation  but  its  president, 
A.  P.  Giannini,  and  many  of  its  officers  are  of  Italian  extraction. 


BRANCH  BANKING  IN  CALIFORNIA  509 

Los  Angeles  Trust  and  Savings  Bank  has  been  authorized  to 
operate  approximately  thirty-five  branch  offices  in  the  metropoli- 
tan district,  some  of  which  have  not  yet  opened  for  business. 
The  two  Los  Angeles  banks  have  also  affiliated  with  themselves 
during  the  past  two  years  sixteen  banks  which  formerly  operated 
as  independent  institutions.1  These  banks  are  all  located  in 
southern  California  (see  map  p.  510),  the  most  remote  from 
the  head  office  being  at  Fresno,  approximately  275  miles  from 
Los  Angeles. 

It  is  the  policy  of  the  officers  of  the  Los  Angeles  Trust  and 
Savings  Bank  to  confine  their  system  to  territory  regarded  as 
tributary  to  Los  Angeles  and  not  to  undertake  to  create  a  state- 
wide system  of  branches.  Fresno  is  somewhat  nearer  to  San 
Francisco  than  to  Los  Angeles  but  it  has  important  commercial 
relations  with  both  cities.  It  is  the  largest  city  in  the  San 
Joaquin  Valley  and  the  center  of  the  raisin  packing  and  has 
other  important  producing  industries.  The  Bank  of  Italy  has 
maintained  a  branch  there  for  several  years  and  has  recently 
acquired  the  First  National  Bank  also. 

The  Sacramento-San  Joaquin  Bank,  also  shown  on  the  map, 
has  its  principal  office  in  Sacramento  and  confines  its  operations 
to  a  limited  portion  of  the  area  of  the  rich  Sacramento  and  San 
Joaquin  valleys.  Other  examples  may  be  found  of  banks  in 
interior  cities  with  branches  in  the  adjacent  towns.  Usually 
only  a  few  branches  are  maintained,  as  for  instance  the  Valley 

fank  of  Fresno  has  branches  in  two  nearby  towns. 
Arguments  for  branch  banking— -The  factors  which  have 
brought  about  the  system  of  metropolitan  branch  banking  in 
California  have  already  been  analyzed.  Similar  development  is 
found  in  other  states,  notably  New  York.  In  the  growth  of 
"zone  banking''  California  has  had  a  unique  development.  It 
is  in  this  field  especially,  therefore,  that  the  California  experience 
is  of  greatest  interest. 

Among  the  economic  causes  which  have  had  a  part  in  the  suc- 
cess of  branch  banking  is  the  ability  of  branch  banks  to  make 
larger  loans  than  can  purely  local  banks.     The  producers  of 

1  Bulletin  of  the  California  Bankers'  Association,  May,  1922,  p.  1597. 


•  Bank  of  Italy  and  branches 

■   LosAngeles  Trust  &  Savings  Bank  and  branches 

•ji  Sacramento-San  Joaquin  Bank  and  branches 


'Air^ 


■~XUoly\ 


T- 


Fig.  i. — Map  of  California  showing  larger  systems  of  branch  banks.     (Pre- 
pared by  the  Federal  Reserve  Bank  of  San  Francisco.)     Data  as  of  July  i,  1922. 


BRANCH  BANKING  IN  CALIFORNIA  511 

California  no  longer  market  their  own  crops  in  small  lots.  J^ Co- 
operative marketing  has  brought  together  the  producers  in  large 
economic  units.  This  means  that  the  size  of  a  single  loan 
required  in  fruit-growing  sections  is  too  great  for  the  country 
bank  to  handle.  In  Fresno,  e.g.,  a  bank  with  $1,000,000  capital 
and  surplus  would  be  regarded  as  a  fairly  large  bank.  But 
the  law  limits  an  individual  loan  by  a  bank  of  this  capital  to 
$100,000.  Fresno  is  the  center  of  the  raisin  industry  and  has 
other  important  fruit-packing  industries.  The  co-operative 
growers'  associations  have  divided  their  banking  business  among 
the  banks  of  the  community,  but  even  under  these  conditions 
the  demand  upon  each  bank  far  exceeds  the  loan  limit  of  the 
ordinary  local  bank.  The  branches  of  the  large  systems  which 
have  extended  into  that  section,  on  the  other  hand,  may  loan, 
upon  proper  security,  any  amount  which  the  head  office  is  allowed 
by  law  to  loan  to  the  same  borrower.  Under  the  branch  system 
therefore  borrowers  in  Fresno  have  direct  connection  with  the 
largest  banks  of  San  Francisco  and  Los  Angeles.  The  same 
condition  prevails  in  other  cities.  The  Bank  of  California, 
National  Association,  has  capital  and  surplus  of  over  $17,000,000 
which  gives  it  a  loan  limit  of  over  $1,700,000.  This  great  loaning 
power  is  a  tremendous  advantage  to  it  in  financing  large  grain 
shipments  .1 

Moreover,  there  are  seasonal  demands  which  local  banks  are 
unable  to  take  care  of  from  their  own  resources.  In  the  past 
they  have  called  upon  their  city  correspondents  for  assistance  in 
carrying  these  loans.  More  recently  the  rediscount  privileges  of 
the  Federal  Reserve  System  have  also  been  availed  of  for  the 
same  purpose.  In  this  respect  a  branch  system  has  some  advan- 
tage in  that  it  can  shift  funds  from  sluggish  to  active  com- 
munities. 

A  further  advantage  which  the  advocates  of  branch  banks 
have  claimed  for  the  system  is  the  ability  to  offer  more  favorable 
interest  rates  to  borrowers.  The  general  tendency  in  rural 
communities  is  to  keep  the  rate  of  interest  fixed  at  a  point  which 
is  almost  invariable  regardless  of  conditions  in  the  general  money 
market.     Fluctuations  in  interest  rates  and  differences  in  rates 


512  HOWARD  H.  PRESTON 

upon  different  classes  of  paper  are  uncommon.  When  a  city- 
bank  acquires  a  branch  in  a  rural  town  or  city  it  conforms  its 
loaning  policy  in  general  to  that  in  use  in  the  main  office.  In 
some  communities  in  California  the  immediate  effect  of  the 
establishment  of  a  branch  has  been  to  reduce  interest  rates  for 
the  better  class  of  loans.  Whether  or  not  this  has  been  solely 
to  attract  new  business  and  will  be  discontinued  when  the 
business  has  been  built  up  cannot  now  be  predicted. 
/  A  branch  bank  also  has  certain  advantages  in  the  assembling 
arkf  interpreting  of  credit  information.  The  responsibility  for 
the  loaning  policy  is  centralized  in  the  hands  of  a  few  men  who 
are  expert  bankers.  Small  country  banks  cannot  secure  the 
information  that  is  available  in  large  institutions.  Frequently 
its  officers  are  not  skilled  in  analyzing  a  borrower's  statement. 
Under  the  branch  system  local  managers  must  of  necessity  be 
allowed  a  large  amount  of  discretion  in  the  making  of  loans.  But 
these  men  are  either  carefully  trained  at  the  main  office  before 
being  trusted  with  this  responsibility  or  they  are  men  of  tested 
banking  experience  who  were  retained  when  the  parent  bank 
took  over  an  institution  that  was  already  established.    \ 

It  is  believed  by  some  students  that  better  credit  control  is 
possible  in  time  of  stress  through  a  system  of  branch  banking. 
Professor  J.  F.  Johnson  has  pointed  out  that  the  unity  of  the 
Canadian  system  enabled  the  banks  to  better  prepare  for  the 
crisis  of  1907.  In  Canada  there  was  a  gradual  contraction  of 
loans  after  June  1  and  no  panic  was  felt  in  the  fall  although  con- 
ditions there  and  in  the  United  States  were  substantially  the 
same.1  Professor  E.  R.  A.  Seligman,  at  the  last  meeting  of  the 
American  Economic  Association  expressed  the  opinion  that 
credit  inflation  when  nearing  the  crest  of  a  boom  period  can  best 
be  controlled  by  the  substitution  of  branch  banking  for  the 
present  competitive  conditions  among  the  thirty  thousand 
American  banks.2     The   Federal  Reserve  System  has  demon- 

1  Joseph  French  Johnson,  The  Canadian  Banking  System.  Publications  of  the 
National  Monetary  Commission,  Senate  Document  No.  385,  61st  Congress, 
Second  Session. 

2  American  Economic  Review,  XII  (March,  1922),  No.  1,  24. 


BRANCH  BANKING  IN  CALIFORNIA  513 

strated  its  ability  to  meet  a  more  serious  situation  than  con- 
fronted the  banks  in  1907.  It  is  believed  that  panic  control  has 
thus  been  attained  but  this  does  not  mean  that  periods  of  stress 
will  not  be  experienced.  California 's  branch  system  is  not  suffi- 
ciently universal  to  form  the  basis  for  any  valid  conclusion  upon 
this  point.  During  the  past  two  years  only  two  state  banks 
have  closed  and  one  of  these  has  been  reopened  upon  an  entirely 
solvent  basis  but  favorable  economic  conditions  rather  than 
branch  banking  appear  to  account  for  this  splendid  record. 

The  advocates  of  branch  banking  hold  that  the  depositor 
is  better  protected  by  a  branch  system.  Adverse  local  condi- 
tions which  might  wreck  a  single  bank  would  not  cause  the  failure 
of  the  entire  system.  It  is  unquestionably  true  that  many  bank 
failures  are  of  small  banks  and  would  be  prevented  by  a  branch 
system.  It  is  also  true  that  should  a  failure  occur  in  a  branch 
system  the  consequences  would  be  more  serious  and  far-reaching. 
Internal  examinations  are  essential  in  a  branch  system  and  ably 
supplement  the  scrutiny  of  the  public  supervisorial  authority. 
Burglary  and  hold-ups  are  less  likely  to  occur  at  a  branch,  since 
surplus  cash  and  all  bond  investments  are  held  in  the  vaults  of 
the  head  office.  •  .    .   ■    <  ■^^    • 

Objections  to  branch  banking. — The  question  of  personnel  is 
crucial  in  any  branch  banking  system.  At  this  point  American 
experience  has  little  to  offer  as  yet  and  conditions  here  are  so 
unlike  those  in  foreign  systems  that  we  cannot  safely  draw  con- 
clusions from  elsewhere.  The  young  man  who  enters  the  service 
of  a  bank  in  England  or  Canada  expects  to  go  wherever  he  may 
be  sent  in  the  line  of  service.  The  assistant  manager  of  an 
American  branch  of  a  Canadian  bank  informed  the  writer  that 
he  has  already  served  in  half-a-dozen  different  branches  in  his 
progress  to  his  present  position.  No  such  tradition  has  been 
built  upon  among  American  bank  employees. 

Officers  of  the  Bank  of  California  testify  that  they  have 
experienced  considerable  difficulty  in  getting  men  in  the  San 
Francisco  bank  to  accept  appointments  in  the  northern  branches, 
even  when  the  salary  was  enough  higher  to  warrant  the  change. 
The  banks  operating  branches  throughout  California  do  not 


514  HOWARD  H.  PRESTON 

appear  to  have  found  any  difficulty  in  taking  care  of  the  situation 
up  to  the  present  time.  Many  of  the  local  branches  are  manned 
by  the  staff  already  in  charge  when  the  institutions  were  taken 
over  but  no  difficulty  has  been  experienced  when  it  has  been 
necessary  to  transfer  men  from  the  larger  offices  to  manage  local 
banks.  The  test  will  come  when  the  management  must  be 
recruited  from  men  who  have  not  proved  their  fitness  by  the 
successful  conduct  of  independent  banks.  The  supporters  of 
branch  banking  hold  that  a  branch  system  offers  the  ambitious 
young  man  superior  training  and  opportunity  for  advancement. 
They  anticipate,  therefore,  that  better  bank  management  will 
result  from  the  spread  of  branch  banking. 

One  of  the  strongest  popular  objections  to  branch  banking  is 
the  fear  of  concentration  of  financial  resources.  Larger  banking 
units  are  inevitable  under  a  branch  system  but  it  does  not  follow 
that  monopoly  of  banking  will  result.  Canada  has  not  experi- 
enced this  condition  and  there  is  no  indication  of  a  banking 
monopoly  in  California.  At  present  stock  in  the  larger  branch 
systems  is  widely  distributed.  The  stockholders  in  local  banks 
have  been  encouraged  to  exchange  their  stock  for  stock  in  the 
larger  system.  On  the  other  hand  it  is  probably  true  that  local 
stockholders  have  little  actual  direction  of  the  bank's  affairs, 
since  their  holdings,  even  if  large  in  the  bank  which  was  ab- 
sorbed, constitute  a  small  minority  in  the  large  branch  system. 
Moreover,  it  appears  likely  that  the  amount  of  locally  owned 
stock  will  decrease  as  time  passes. 

This  fear  of  centralized  control  of  banking  resources  has  been 
increased  in  California  by  the  possibility  of  indirectly  combining 
banking  with  other  industrial  and  commercial  enterprises. 
Several  of  the  larger  banks  with  branches  have  organized  sub- 
sidiary corporations  which  are  owned  by  the  same  stockholders. 
Since  these  corporations  are  not  chartered  under  the  Bank  Act 
they  have  wider  latitude  in  the  range  of  business  activities  which 
they  may  carry  on.  One  of  the  larger  banks  earlier  engaged  in 
the  insurance  business  by  means  of  its  auxiliary  corporation. 
This  action  met  outside  opposition  and  has  been  discontinued. 
The  present  tendency,  therefore,  appears  to  be  to  confine  the 


BRANCH  BANKING  IN  CALIFORNIA  515 

activities  of  the  subsidiary  organization  to  facilitating  strictly 
banking  functions.  They  may  be  used  to  assist  in  the  acquisition 
of  additional  branches,  to  hold  real  estate,  to  take  over  doubtful 
assets  thus  enabling  the  bank  to  charge  off  the  same,  and  to 
operate  the  bond  and  investment  department  of  the  bank. 
The  possibib'ty  of  creating  such  a  corporation  is  not  confined 
to  a  bank  with  branches  and  it  is  not  essential  to  branch  banking. 
The  connection  between  the  two,  however,  has  contributed  to 
the  opposition  to  branch  banks  on  the  ground  that  it  will  inevit- 
ably result  in  financial  concentration. 

Branch  banking  encounters  strong  opposition  based  upon 
local  pride  and  sentiment.  The  American  system  of  unit  banks 
has  doubtless  been  a  powerful  factor  in  the  development  of  the 
United  States.  The  fear  that  this  will  be  lost  through  a  branch 
system  and  the  needs  of  the  community  sacrificed  in  order  to 
meet  the  demands  of  enterprises  fostered  by  the  main  bank  is 
deep-seated.  The  local  banker  is  a  permanent  resident  in  the 
community  in  contrast  to  the  branch  manager  who  may  stay 
only  a  few  months  or  years. 

The  psychology  of  this  situation  is  important.  Local  preju- 
dice has  been  used  in  California  against  the  branch  banks.  This 
prejudice  appears,  however,  to  be  based  more  upon  sentiment 
than  upon  actual  conditions.  Frequently  the  management  of  a 
locally  owned  bank  is  allowed  to  stagnate.  The  young  branch 
manager  knows  that  his  personal  advancement  depends  upon  his 
success  in  securing  the  good  will  of  his  community.  One  of  the 
best  ways  to  do  this  is  to  impress  upon  the  people  of  the  com- 
munity, where  he  is  located,  that  the  bank  is  looking  out  for  their 
interests.  Where  the  former  management  is  retained  the 
strength  of  the  "home  bank"  argument  is  largely  lost.  The 
latter  arrangement  has  been  so  largely  the  method  used  in  Cali- 
fornia mergers  that  the  conditions  there  do  not  yet  afford  a  test 
of  this  contention.  Even  where  an  outside  representative  is  sent 
in  as  branch  manager,  there  are  still  a  large  group  of  local  stock- 
holders, a  local  advisory  committee,  and  many  local  employees. 

Closely  connected  with  this  argument  is  the  contention  that 
funds  will  be  drained  from  the  country  to  the  city.     In  Canada 


516  HOWARD  II.  PRESTON 

the  banks  have  shifted  money  from  the  older  eastern  communities 
to  the  western  provinces  where  higher  interest  rates  prevail.  In 
California  there  is  no  marked  tendency  in  either  direction. 
Country  banks  in  the  United  States  have  learned  the  possibilities 
of  buying  commercial  paper  and  utilize  this  outlet  for  all  of  their 
loanable  funds.  They  also  look  to  city  correspondents  and  the 
Federal  Reserve  banks  to  assist  in  meeting  seasonal  local  demands. 
Some  banks  are  almost  constantly  owners  of  large  amounts  of 
outside  paper  and  bond  investments.  Others  find  it  necessary 
to  rediscount  rather  frequently.  The  same  conditions  prevail 
in  the  branch  systems  of  California.  Some  branches  usually 
have  more  deposits  than  local  loans ;  others  are  constantly  debtor 
to  the  head  office.  In  still  others  there  are  seasonal  shiftings. 
If  anything  the  branch  system  appears  to  have  facilitated  the 
placing  of  funds  where  the  most  active  demand  exists. 

Branch  banking  has  inevitably  tended  to  disrupt  existing 
correspondent  relations  between  banks.  Usually  the  bank  which 
is  absorbed  into  a  branch  system  has  not  been  <a  correspondent 
of  the  bank  of  which  it  becomes  a  part.  In  so  far  as  the  city 
banks  have  specialized  in  country  bank  accounts  they  will  lose 
part  of  their  business,  unless  they,  too,  establish  branches. 
Country  banks  in  the  producing  sections  have  usually  maintained 
correspondent  relations  with  banks  in  San  Francisco,  Los 
Angeles,  and  often  in  Eastern  cities.  It  is  possible  that  the 
change  in  correspondent  arrangements  will  work  adversely  in 
the  matter  of  securing  funds  to  meet  seasonal  demands.  In  any 
event  it  raises  the  question  of  how  the  city  bank,  without 
branches  or  country  correspondents,  can  participate  in  the  neces- 
sary and  profitable  financing  of  the  fruit  production  of  the  state. 

The  bankers'  organizations  have  generally  opposed  branch 
banking.  In  1916  the  American  Bankers'  Association  voted 
upon  and  rejected  a  resolution  supporting  branches  of  national 
banks.  In  the  192 1  convention  the  National  Bank  Division 
passed  a  resolution  asking  Congress  to  place  them  on  a  basis  of 
approximate  equality  with  state  banks  in  this  matter.  This  was 
simply  in  the  interest  of  justice  and  not  an  expression  upon 
branch  banking  as  such.     In  fact  some  supporters  of  the  resolu- 


BRANCH  BANKING  IN  CALIFORNIA  517 

tion  stated  that  they  were  opposed  to  the  principle  of  branch 
banking.  The  State  Bank  Division,  at  the  same  meeting, 
adopted  a  resolution  opposing  branch  banking  of  any  kind.1 
This  view,  however,  is  by  no  means  unanimous  among  bankers. 
The  numerical  strength  of  the  opposition  is  easily  explained  since 
there  are  now  about  30,000  unit  banks  in  the  United  States. 

Summary. — This  investigation  into  branch  banking  shows 
that  national  banks  in  some  states  are  unfairly  handicapped  by 
their  inability  to  establish  branches.  The  law  should  be 
amended  and  all  uncertainty  as  to  their  right  to  establish 
branches  cleared  up.  Since  an  indirect  method  already  exists 
for  them  to  get  branches  a  direct  method  should  be  provided. 
Branch  banking  has  spread  in  the  United  States  during  the  past 
decade  although  several  states  meantime  have  taken  action 
prohibiting  any  further  branches.  In  many  states  branch  bank- 
ing is  limited  to  a  single  community.  The  primary  reason  for 
this  development  is  the  convenience  of  patrons.  The  possibilities 
of  this  type  of  branch  banking  are  very  limited  and  little  objec- 
tion is  raised  against  it. 

California  banks  are  making  the  experiment  with  branch 

banking  over  a  wider  geographical  area.     The  development  is  too 

recent  to  afford  a  basis  for  final  conclusions.    ,It  has  proved 

successful  where  tried  and  is  spreading  throughout  the  state. 

It  appears  probable  that  there  will  be  a  still  further  development 

of  branch  banking  in  the  United  States.     For  this  reason  the 

experience  of  California  banks  will  be  watched  with  unusual 

interest. 

Howard  H.  Preston 
University  of  Washington 

1  Journal  of  the  American  Bankers1  Association,  November,  192 1,  pp.  405, 
419,421. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

BERKELEY 

Return 

to  desk  from  which  borrowed. 

This  book  is  DUE  on  the  last  date  stamped  below. 

tH<W'48Sl 

RECD  LD 

AUG  2  6 1963 

\tf 

21May'5&,«* 

i 

MAY7-I95f 

nKARfUH 

U6  86  W 

LD  21-100m-9,'47(A5702sie 

)476 

*s 


Stockton,  Calif. 

PAT.  JAN.  21,  1908 


696609 

liGrlC 
%1 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


